COBALT advised a client on obtaining a positive binding ruling from the Estonian Tax and Customs Board concerning changes to the vesting terms of a high-value employee share option. In the ruling, the tax authority confirmed that accelerating the vesting of a share option does not in itself constitute a material amendment to the option agreement that would restart the three-year holding period required for the tax exemption applicable to employee share options.
Under the Estonian Income Tax Act, the exercise of an employee share option is tax-exempt if at least three years have passed between the grant of the option and the acquisition of the underlying shares. According to the practice of the Estonian Tax and Customs Board, this three-year period is interrupted and restarts if material terms of the option agreement are amended. Until now, however, there has been no clear practice as to whether changes to the vesting terms of an option, including changes to the vesting schedule, should be regarded as a material amendment to the option agreement.
The case advised by COBALT concerned a high-value share option granted to a senior executive, which was originally subject to a longer vesting period. In light of the results achieved by the executive, the company wished to accelerate the vesting of the option without changing the underlying shares or the exercise price.
The Estonian Tax and Customs Board agreed with COBALT’s position that shortening the vesting period should be distinguished from exercising the option. According to the tax authority, shortening the vesting period does not in itself provide the option holder with an immediate additional economic benefit, as the economic benefit arises upon exercise of the option. The tax authority therefore concluded that, in the circumstances described, accelerating the vesting of the option did not constitute a material amendment to the option agreement and did not cause the three-year period to be interrupted and restart.
The client was advised by Managing Associate Tõnu Kolts and Associate Kerstin Tang.
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